From today's WSJ:
public.wsj.com
August 28, 2001
Enron Aims to Be Easier Read
In Order to Refuel Enthusiasm
By Rebecca Smith and John Emshwiller
Staff Reporters of The Wall Street Journal
Can a humbler, more-informative Enron refuel investor
enthusiasm?
That's the hope of Kenneth Lay, founder and chairman as well
as the once and once-again chief executive of this Houston
energy and trading company. Enron has been regarded as one
of the nation's most innovative -- though bedevilingly
complicated -- companies. Mr. Lay acknowledges that Enron,
which grew into a colossus over the past decade with a
hard-charging, in-your-face management style, has "lost some
credibility" with the investment community.
"I want to make sure we restore that credibility," he said in an
interview last week.
He promises fuller disclosures, and Enron has a lot riding on
whether investors find them sufficient -- and soothing. Last
summer, the company's stock price hit $90 a share, giving
Enron a dazzling price-to-earnings ratio exceeding 60. As of 4
p.m. in composite trading Monday on the New York Stock
Exchange, Enron was at $37.76, up $1.41, sporting a
more-conventional P/E ratio of about 21 times this year's
expected earnings.
The stock slide has multiple causes, including uncertainty about
trading profits, due to the slower economy and a drop in energy
prices as well as mounting concerns about the difficulty that
investors face in figuring out how the company's extremely
complex operations make money.
Layer on management turnover. Earlier this month, Enron lost
its chief executive when Jeffrey Skilling, Mr. Lay's longtime
lieutenant and handpicked successor, unexpectedly resigned
after only about six months in the top job. The 47-year-old Mr.
Skilling was widely credited with helping to build Enron into the
nation's leading energy trader and personified the company's
brash manner. During an investor conference call in April, for
example, when a caller criticized Enron's schedule for releasing
financial information, Mr. Skilling responded by calling him an
"ah." Mr. Skilling, who is on a river rafting trip, couldn't be
reached for comment but others at the company, including Mr.
Lay, say it was an unfortunate word choice that continues to
haunt the company. At the time, Mr. Skilling said he regretted if
anyone was offended by his remark.
Though Mr. Skilling initially said his resignation was strictly for
personal reasons, he added in a later interview that his own
feelings of failure over the plummeting stock price had
contributed greatly to his early departure. The 59-year-old Mr.
Lay resumed the chief executive's job that he had previously
held for 15 years.
Jeff Dietert, an analyst from Simmons & Co. International in
Houston, figures that Enron's P/E is likely to be permanently
lower, though still somewhat higher than the average for its peer
group. Mr. Dietert views Dynegy as the premium energy stock,
which will fetch the highest trading multiple.
While Mr. Lay insists that Enron's overall operating and
financial condition is very strong, the unexpected exit of Mr.
Skilling has some wondering if "there isn't another shoe about to
drop," says Carol Coale, an analyst at Prudential Securities.
To lessen such concerns, Mr. Lay promises to address the
longtime analyst and investor complaint that Enron doesn't
provide enough information about its extremely complex
operations, which include not only construction of natural-gas
pipelines and power plants but the trading of an ever-expanding
array of commodities. Nowadays, Enron trades everything from
telecommunications capacity to weather-linked derivative
contracts.
"I truly do not understand all their financial arrangements, and
I've sent information on their deals to accountant friends and
they don't understand them either," says Rebecca Followill, an
analyst at Howard Weil, who refers to Enron's accounting
methods as a "black box."
Yet analysts long put out "buy" recommendations on Enron
stock, in large part because the company has issued consistently
strong earnings. In 2000, for example, the company reported
net income rose 10% to $979 million on revenue that more than
doubled to $100 billion. Assets over the past five years more
than quadrupled to about $65 billion.
"When the stock price and earnings were going up so quickly,
less attention was paid to the quality of earnings," says Zach
Wagner, an analyst at Edward Jones in St. Louis. With the
stock price down, "Enron has to show that they do have quality
earnings. The only way to do that is to open up the books," he
says.
Mr. Lay says Enron will start putting out more detailed
information on individual business segments and "give a better
idea of the profitability of various businesses" such as its
wholesale-services category where a lot of business activities
gets lumped.
In another bow to criticism, Chief Financial Officer Andrew
Fastow as of July 31 quietly ended his ownership and
management ties with certain limited partnerships. Over the past
two years, Enron has placed billions of dollars of assets and
millions of shares of its stock into complex transactions with
these partnerships. Enron executives say the transactions were
perfectly proper and that the company asked Mr. Fastow to
take part in the deals, which were done to reduce the risk of
fluctuating market prices. An Enron spokesman says Mr.
Fastow has no comment on the matter.
Yet some analysts say they have been concerned about having
Enron's top financial executive in a fiduciary position at entities
that, at least potentially, stood to gain if the company lost in the
transactions -- and vice versa. Mr. Lay says the transactions
involving Mr. Fastow had become a "lightning rod" for criticism
so "we're better off not doing it."
Of course, it's still a challenge trying to make sense of these
transactions. Consider the following snippet from Enron's
second-quarter report concerning some Fastow-related deals:
"Enron has entered into agreements with entities formed in
2000, which included the obligation to deliver 12 million shares
of Enron common stock in March 2005 and entered into
derivative instruments which eliminated the contingent nature of
existing restricted forward contracts executed in 2000. ... In
exchange, Enron received notes receivable from the Entities
totaling approximately $827.6 million. In addition, Enron
entered into share settled costless collar arrangements with the
Entities on the 12 million shares of Enron common stock. Such
transactions will be accounted for as equity transactions when
settled. Enron received a $6.5 million note receivable from the
Entities to terminate share-settled options on 7.1 million shares
of Enron common stock. The transactions resulted in noncash
increases to noncurrent assets and equity."
Reading Enron's financial statements can make "you kind of
step back and say, 'What?' " says Jeff Dietert, the analyst at
Simmons.
Enron faces challenges beyond just financial opaqueness. It is
owed $500 million for power delivered to California's troubled
utilities -- a much bigger unpaid tab than analysts originally
believed. In India, Enron is having difficulty getting paid for
electricity from its 65%-owned, $3-billion Dabhol power
project because of a dispute with government officials over
power prices. Mr. Lay says Dabhol is among the approximately
$5 billion in overseas assets that Enron plans to sell over the
next three years while keeping $4 billion in such holdings.
Mr. Lay also must create a post-Skilling succession plan. He
says he will soon recommend to the board the names of one or
two executives to join him in the office of chairman.
When all is said and done, will the world really see a softer side
of Enron? "I'm not sure that Enron is exactly humbled," says
UBS Warburg analyst Ron Barone. "But they're certainly under
a new kind of pressure." |
